The chemical industry is not building new plants or expanding existing plants in the United States anymore. There are and will continue to be exceptions, but they are few because overall, the industry has stopped expanding production capacity in the United States. The cost to build a new plant overseas is a fraction of the cost to build a plant in the United States. Once a plant has been built, the cost to operate and maintain a plant in overseas countries is also a fraction of the same costs in the United States. It is widely known that labor rates overseas are a fraction of U.S. labor rates. It does not appear that neighborhood watch and special interest groups have taken to protecting affluent lifestyles from chemical plants in their backyards in other parts of the world as they have here in the United States. Further, agencies comparable to OSHA and the EPA seem non-existent overseas (with the exception of Europe), and the resulting cost of compliance also seems to be non-existent. To make matters worse, the cost of a major raw material input to the U.S. chemical industry - natural gas - has risen from $2-3/BTU to $5-6/BTU and shows no signs of receding anywhere close to the $2/BTU level in the foreseeable future. Because of all these issues, many other manufacturing industries have also begun relocating the production facilities to overseas countries. The chemical companies have, both rightly and conveniently, taken some opportunity to use these actions of other industries to justify locating new plants overseas, to be close to their customers.

There is still a large and vibrant infrastructure of chemical plants, across many segments from basic to specialty and fine chemicals, operating in the United States. The challenges facing these plants are the most demanding any of us are likely to see in our lifetime. Most executives at these companies are addressing the economic forces by radically reducing the operating costs of their plants, mostly due to the sheer desperation caused by the disparity in their operating costs versus the overseas plants. Capital expenditures have been slashed and/or eliminated. Engineering and maintenance personnel have been reduced by multiples. New purchasing personnel are also demanding ever-increasing concessions from equipment vendors.

In the Fall of 2003, the stock market responded to the modest improvements in the publicly traded chemical companies operating margins with favor, but this is likely to be short lived because the fundamentals of the businesses have changed. New and less-expensive production capacity in overseas markets continues to place incredible pressures on pricing and margins for U.S. chemical companies.

In 2002, for the first time in 70 years, the dollar value of chemical imports exceeded the dollar value of U.S. chemical exports, a major shift in the trade balance and only a continuation of an ongoing trend that will continue to put pressure on the U.S.-based plants. There is no grand plan on how to operate the plants with less capital and people, but necessity being the mother of invention, those souls that remain at the plants will make things work - somehow. This is a problem.

The U.S.-based chemical plants and their many suppliers have a lot of hard work ahead. There are two more steps that many chemical companies could do to improve their profitability. Among those companies that operate multiple plants, it is fairly common knowledge that each of them operates as an "island nation" unto their own. They are very independently minded, to say the least. Most chemical companies have prospered due to their product development capabilities, and not because of low-cost operating capability. While this is understandable, it needs to change so that they share and utilize resources to operate more efficiently. This will be very hard work and will take time to accomplish. As an example, the redundant inventories of spare equipment and parts among all these plants probably totals into the millions of dollars for many companies. Furthermore, these plants routinely scrap most worn equipment at the end of its "useful" life. In some cases, that equipment could be upgraded and its life extended. Chemical companies could reap tremendous savings if they could exert greater central control and consolidate all spare equipment to a central location, a clearinghouse, in order to maximize the utility among all of the plants. With proper maintenance and effective utilization of equipment, significant redundancies in plant equipment inventories could be translated to real dollars. Further, some equipment can be refurbished and returned to like-new condition for a fraction of new replacement costs. Another thought: the chemical companies could require their key vendors to provide these services.

The final step is that the chemical plants could achieve significant process efficiency improvements by utilizing today's equipment. The vast majority of operating chemical plants in the United States are over 20 years old. Many are greater than 40 years old. Most of these plants are operating with inefficient (by today's standard) equipment. The prevalent operating mantra at most plants is "if it ain't broke, don't fix it." This is a deterrent to approaching productivity increases in a reasonable way. Further, the products being made at many of these plants have changed. New formulations impose different operating characteristics on the equipment in service, often at a discount to potential productivity. While this conservative culture is understandable in some respects, it is costing the chemical companies millions of dollars in productivity opportunity. If the senior executives really want to increase process yields, they should mandate, encourage and reward their plant operators for prudently trying and achieving increased process yields. This is very hard work too. Maybe the found money from the example in step two could pay for a dramatic increase in productivity and reliability. As it stands now, the chemical executives are setting their U.S. plants (operating with old equipment and technology) up for failure by comparison of costs to new plants (operating with new technologies) overseas.

The suppliers of equipment to the industry have to change their approach too. The chemical plants just are not buying much new equipment these days. Their products need to be more solution oriented. The plants need helpful and trustworthy suppliers who are investing in ways to help the chemical industry reduce costs and increase production. Equipment vendors have to clearly articulate how their products and services can be used to reduce costs and increase productivity. Many will have to transform their business operations to do so. That will be painful too. Unfortunately, the days of long lunches and golf outings are few and far between.

We all like to lament the loss of U.S. manufacturing jobs and the current woes in the chemical industry. The reality is that the forces driving these problems are well beyond the control of any one of us. While our government regulations provide us with the best working environment in the world, they come at a cost. Additionally, the differences in labor rates and the increases in raw material costs are now factors of a global economy. What is in our control is the ability to improve the operating efficiency of our own companies. Maybe we ought to focus on our own actions and operations and reapply that great American work ethic and ingenuity that led to the previous industrial boom.

David Proctor's comments were sent to PCI as a Letter to the Editor in response to the January and February Viewpoint columns. You can contact him at dproctor@philamixers.com.